Mortgage regulators ride to the rescue way too late

The best analysis I’ve seen about the new rules to protect consumers from risky home loans didn't come from one of the many experts quoted in the news stories.

It came in the anonymous comment of a frustrated citizen.

He, or she, compared the new rules to the fire brigade arriving after your house has burned down … carrying a bucket of water... on a donkey.

The bucket and donkey seemed a bit harsh, but otherwise it’s hard not to feel that these mortgage regulations are your government springing (or perhaps ambling) into action, too late.

They might have been a real help ... if they’d been issued in 2006, or even earlier.

Unfortunately, after spending most of the day reading just about everything written about this, I came away thinking these rules won't offer home buyers or the economy much help now — and only limited protection in the future.

The long-awaited lending rules were released today by the Consumer Financial Protection Bureau, a watchdog agency created following the economic crash out of congressional horror at the banking industry’s behavior.

Really, the CFPB only kinda, sorta issued new rules. They’re still being finalized; they won’t take effect until January 2014, and there will be exemptions for some of the key regs for seven (!) years.

Still, they do include some commonsense reforms of the mortgage lending industry, almost all based on the crisis we've just experienced.

You could basically get a home loan by saying you thought you might like one (no further documentation required), and most of the experts in the industry assured us a golden day had arrived — our homes were only going to go up in value forever.

At the height of the madness, lenders eagerly foisted home loans on willing consumers that didn't require any proof of income, that offered rock-bottom “teaser” interest rates or that even deferred interest payments completely for years.

We all know what happened. Like every “market bubble” in the history of the world, this one came crashing down. We’re still paying the price.

The new rules the Fed more or less announced Thursday would address this by setting basic standards for something called a “qualified” mortgage.

In a nutshell, lenders will now be required to actually find out if a person is really earning the money they say they’re earning (imagine that!) and will have to follow certain guidelines concerning a borrower’s creditworthiness.

One key requirement: Borrowers generally will have to have a debt-to-income ratio no greater than 43% to qualify.

These qualifying loans also can’t be interest-only or negative-amortization loans (the kind where your debt is growing, not shrinking, over time) or some of the other crazy lending options the industry was pitching near the end.

All this makes sense, more or less. It also doesn't amount to that much.

In the wake of the crash, most lenders have already initiated more conservative standards. The kinds of loans the feds have finally gotten around to restricting have largely disappeared.

In fact, one of the biggest complaints about the banking industry over the last few years is that it has become too careful, hindering the economic recovery by restricting credit to worthy borrowers.

Yes, you say, but at least this will keep the worst abuses from coming back.

That may be true. But in return for following what are really just basic good practices, the banks get handed a big reward: The ability of consumers to sue for misleading lending practices will be limited for these qualifying loans.

That alone has caused the National Consumer Law Center to speak out against the new rules.

There are other apparent concerns. For one thing, the rules regulating the fees lenders can tack on to your home loan look weak. And bigger fees provide a bigger incentive to make bad loans.

For another, lenders will still be able to write nonqualifying loans; they just won’t have the government legal protection that a qualifying loan assures.

This will make these higher-risk loans less attractive, especially at first, but as the economy once again heats up, one can be sure that the lending industry will probably find new and innovative ways to make loans it shouldn't be making to consumers who shouldn't be taking them out.

Given our sad record of regulating the banking industry, we can expect rules to curb those abuses to come out a few years after they've wrecked the economy.